What does high vacancy actually mean for office tenants?

August 2023

Understanding the Sydney CBD prime grade leasing activity in the market against supply levels is essential when tailoring strategy for tenants.

My research shows in the years between 2026-2028, there will be:

• A total of 446,000sqm of lease expiries (excluding surrender options).

• Net supply of 319,000sqm.

• Up to 127,000sqm of unmet tenant demand.

After further analysis, I have come to this opinion when considering the office market from the occupier's perspective:

The shortage in future supply volumes creates a more competitive atmosphere for lease negotiations - perceived or genuine - underscored by the potential unfulfilled demand

What does this mean? Despite office vacancy currently sitting at 11.5%, net absorption at -40,000 sqm and projections for vacancy to remain elevated and demand soft, it's not accurate to assume we are and will be in a 'tenant-favourable market' without considering all the facts relevant to you.

Further rationale:

• I acknowledge that not all lease expiries will actively enter the market, however, financial metrics suggest that more tenants are willing to consider relocation options (flight to quality) than before.

• Market exploration by tenants can be further encouraged if they consider reductions in space, agile work practices and speculatively built fit-outs to manage total costs.

• Drawing from recent transactional experiences, the pool of suitable property choices might prove narrower than initially anticipated.  This is especially the case when considering criteria such as delivery date of asset, precinct location, floor plate configuration, financial preferences (landlord vs tenant), fitout requirements, tenant timing, etc.

With all the above in mind, tenants are more likely to gain an advantage by acting early and being prepared.